How Netflix Reinvented HR

The first took place in late 2001. Netflix had been growing quickly: We’d reached about 120 employees and had been planning an IPO. But after the dot-com bubble burst and the 9/11 attacks occurred, things changed. It became clear that we needed to put the IPO on hold and lay off a third of our employees. It was brutal. Then, a bit unexpectedly, DVD players became the hot gift that Christmas. By early 2002 our DVD-by-mail subscription business was growing like crazy. Suddenly we had far more work to do, with 30% fewer employees.

One day I was talking with one of our best engineers, an employee I’ll call John. Before the layoffs, he’d managed three engineers, but now he was a one-man department working very long hours. I told John I hoped to hire some help for him soon. His response surprised me. “There’s no rush — I’m happier now,” he said. It turned out that the engineers we’d laid off weren’t spectacular — they were merely adequate. John realized that he’d spent too much time riding herd on them and fixing their mistakes. “I’ve learned that I’d rather work by myself than with subpar performers,” he said. His words echo in my mind whenever I describe the most basic element of Netflix’s talent philosophy: The best thing you can do for employees — a perk better than foosball or free sushi — is hire only “A” players to work alongside them. Excellent colleagues trump everything else.

The second conversation took place in 2002, a few months after our IPO. Laura, our bookkeeper, was bright, hardworking, and creative. She’d been very important to our early growth, having devised a system for accurately tracking movie rentals so that we could pay the correct royalties. But now, as a public company, we needed CPAs and other fully credentialed, deeply experienced accounting professionals — and Laura had only an associate’s degree from a community college. Despite her work ethic, her track record, and the fact that we all really liked her, her skills were no longer adequate. Some of us talked about jury-rigging a new role for her, but we decided that wouldn’t be right.

So I sat down with Laura and explained the situation — and said that in light of her spectacular service, we would give her a spectacular severance package. I’d braced myself for tears or histrionics, but Laura reacted well: She was sad to be leaving but recognized that the generous severance would let her regroup, retrain, and find a new career path. This incident helped us create the other vital element of our talent management philosophy: If we wanted only “A” players on our team, we had to be willing to let go of people whose skills no longer fit, no matter how valuable their contributions had once been. Out of fairness to such people — and, frankly, to help us overcome our discomfort with discharging them — we learned to offer rich severance packages.

There is a limited number of “A” players in mental fields, knowledge workers, due to the tyranny of the IQ curve. How does an employer find them? Since it is illegal to do IQ testing to find employees, testing directly for IQ cannot work. The employer must find a surrogate method such as asking to see, for example, the prospective employee’s GREs. Voilà, the IQ is found. Now find a method to determine the prospective employee’s work ethic and the problem is solved on who to hire.

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